Part of the risk involved in securities comes from the unpredictable nature of the market, but unscrupulous stockbrokers pose further danger.
Protect your investments by knowing the most common types of stockbroker fraud. Continue reading for a brief summary.
Being aware, in a general sense, of different types of stock broker fraud is the best way to protect your money from unscrupulous fraud.
1. Brokers May Not Supply False or Misleading Information
Your broker may mislead you for a number of reasons, from supporting his own personal investments or his company’s bottom line to simple negligence. These cases, as well as instances of trading based on insider information, constitute stockbroker malpractice.
2. Trading without Your Consent Constitutes Securities Fraud
The law requires brokers to obtain authorization before making purchases on behalf of investors. Your broker should inform you of the terms of any purchase before completing the transaction, and confirm those details again once the trade is complete. Failure to do so is punishable by law.
3. Misrepresentation and Omission are Prohibited
A broker may try to influence your investment choices by either misrepresenting facts or omitting information that might otherwise dissuade you from certain purchases. This removal of your ability to make informed decisions constitutes investment fraud.
4. Brokers Must Maintain Licensing and Registration
Stockbrokers and brokerage firms are required by law to register and obtain licensing through specific government agencies. Any broker practicing outside of these legal channels is committing securities fraud, and is susceptible to penalties.
5. Breach of Promise is a Form of Stockbroker Malpractice
Also called "breach of contract," this refers to any instance in which your broker does not honor the terms set forth in your initial investment agreement. These violations may be easier to prove than other types of financial fraud.
6. Making Unsuitable Purchases May be Considered Investment Fraud
You trust your stockbroker to make investments that are in line with your requested level of risk and potential gain. He in turn is required by law to work within these guidelines and protect the best interests of your portfolio, or risk harsh legal penalties.
7. Margin Accounts are sometimes Open to Abuse
Money provided to a broker for investment is generally deposited into a cash account. Margin accounts, however, use your investment as collateral for an equal amount, doubling your investment potential. While brokerage fees should be based on the actual amount invested, less scrupulous firms sometimes charge these fees based on the doubled margin account balance.
8. Stockbroker Fraud Can Include Lack of Diversification
Over-concentration of an investor’s portfolio is irresponsible and, ultimately, illegal. The losses incurred by so many when the dot-com bubble burst are a clear example of how failure to diversify can do great harm to your portfolio.
9. Your Broker has Fiduciary Responsibility Standards to Uphold
Anyone charged with managing your money must do so diligently, while protecting your interests. Brokers operating outside these parameters fail to live up to their fiduciary duty, and can be cited for a number of more specific violations.
10. In Some Cases, Negligent Portfolio Management is Financial Fraud
Your broker must always execute your instructions as to where and how your money is invested. Failure to do so, even in cases where the broker believes he is protecting your investments, qualifies as negligence.
11. Firms can be Held Responsible for Lack of Supervision
Lack of supervision applies specifically to firms, who are responsible for supervising their employees and protecting investors. When an individual broker commits any of the above infractions, his employing firm faces penalties for failure to supervise.